SECP: Don’t over-regulate, please

WEB DESK: The Securities and Exchange Commission of Pakistan (SECP) has reminded the Mutual Fund industry of the limits imposed on them by it: investment in mutual funds and a single fund must not exceed 50 percent and 20 percent limits, respectively.

The need to reiterate these limits arose following on inspection of accounts of a Pension Fund that revealed that “66 percent of their total was invested in mutual funds in violation of the limit imposed by the SECP that over 50 percent of the amount should not be placed in a Mutual Fund and 20 percent in a single Fund within it”. As such these limits have been breached and a show-cause notice to the trustees of the Pension Fund has been issued, says a report in this newspaper.

It increasingly appears that the SECP lacks a coherent strategy for development and is more interested in regulations. Why should there be a limit on an instrument or a vehicle instead of limit on asset class? After all there are various asset classes where usually high exposure can impact investment. Thus, the regulations in our opinion appear to be erroneous.

Exposure to an asset class needs to be regulated and not the instrument or vehicle used for investment. We seem to be very impressed with our Indian neighbours as we crudely ape them in issuing SROs and other regulations without engaging the stakeholders.

The SECP needs to interact more with stakeholders prior to finalising any regulation. And, the apex regulator also needs to consult the Mutual Fund industry on tax issues. The SECP did well to consult relevant stakeholders on REIT. Changes made in REIT rules did kick-start a process that had remained dormant for a long time. A lot of work has been done and still needs to be done at the SECP level to regulate the capital market efficiently.

State Bank of Pakistan has imposed a cap on banks’ exposure to the stock market or in equities. But there is no limit or cap on how much banks can invest in Treasury Bills and Pakistan Investment Bonds. Similarly, why should there be any limit on money market funds of mutual funds if invested in a sovereign paper? One can understand the imposition of limit on private or corporate issuance of bonds but not on those issued by the sovereign. After all, sovereign lending is treated at zero risk because the sovereign by law can and is allowed to print money or monetize its debt.

So the SECP appears to be off the track on this issue. Let us not over-regulate the mutual fund industry and instead allow it to grow. In this day and age one cannot use force or a hammer. Regulators instead need to manage their domain. Market players are fully justified and need to protest against erroneous regulations that can straight jacket an industry. A soft regulatory touch is more effective than heavy handedness. We do understand that the PML (N) government had inherited a royal mess.

The dark clouds on the horizon seem to be lifting but much more is needed for sun shine to seep through and shed a bright light on Pakistan. This brightness is only possible with a more coherent strategy aimed at development. We do not have to reinvent the wheel if it is available in the developed world. In the developing world, the regulators need to co-ordinate and be ahead of the curve. After all, development is also their responsibility in a developing country besides regulating the markets.